Systemic folly actually pervades the Banking system the world over. Are we saying that the problem of calibrating a tail risk and designing a capital buffer adequate enough by the regulator is a good enough riposte by the regulatory body and that through this instrument banks need not then have to be bailed out by the tax-payer? So it is finally the naïve regulator who is to be blamed for the delay?

The crucial question is: What transpires between investors and bankers in a regime where risk-pricing is left to the interpretation of tail distributions, where mis-pricing is bound to happen due to inherent externalities that have been vitiated by the whole banking-financial system?

Haldane in his seminal analysis gives us some answers in his paper ‘Risk Reallocation’, “As important as these potential pricing errors were the incentives they generated for originators and end-investors. Given the
apparent levels of excess return, it is easy to see why less sophisticated investors would
have had a voracious appetite for tail risk instruments during the boom years. Meanwhile, on the supply side, the originators of these products (the banks) will have had equally strong incentives to manufacture them for onward sale. Yet lurking beneath those market developments was a market failure. Mispricing resulted in incentives to redistribute risk to those least able to price, manage and, hence, potentially bear it. In other words, non-bank investors were attracted by the high returns and seemingly low risk, particularly of the
super-senior tranches, but did not have the capability to measure and model the true risk of these products, nor in some cases the balance sheets to weather the subsequent mark-to-market volatility.”

Banking reform is still at the tip of the iceberg and the larger polity must find a broad solution to these problems where bankers, the shadow banking system and the investors (speculators included) are intertwined in risk-linkages that do not bode well as the system lacks the ability to model the pricing of risks.

What has happened during this "crisis"? Those with the greatest power have become wealthier than could have been imagined. A great mass of people have lost their wealth, futures and security. The gap between the few and the many has widened.

"Why have we made so little progress?" Because psychoanalysis isn't applied to quant(er)s. Liberal thinking on economic matters rarely wins over the conservative thought process. It has been suggested the best way to “win over” an opposing view is to “argue” in the mode of the opposing person(s) you’re trying to convince into thinking otherwise. This theory, however, would not be applicable to policymakers in Congress since the bipartisan clap-trap from those talking heads, only reflects the legislative objectives to be more similar, than they are to be different.

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